Dashing Co manufactures women’s clothing and its year end was 30 April 20X5.

You are an audit supervisor of Jaunty & Co and the year‐end audit for Dashing Co
is due to commence shortly.
The draft financial statements recognize profit before tax of $2.6m and total assets
of $18m. You have been given responsibility for auditing receivables, which is a
material balance, and as part of the audit approach, a positive receivables
circularization is to be undertaken.
At the planning meeting, the finance director of Dashing Co informed the audit
engagement partner that the company was closing one of its smaller production
sites and as a result, a number of employees would be made redundant. A
redundancy provision of $110,000 is included in the draft financial statements.
Required:
(a) Describe the steps the auditor should perform in undertaking a positive
receivables circularization for Dashing Co. (4 marks)
(b) Describe substantive procedures, other than a receivables circularization, the
auditor should perform to obtain sufficient and appropriate audit evidence to verify
EACH of the following assertions in relation to Dashing Co’s receivables:
Note: The total marks will be split equally between each part. (6 marks)
(i) Accuracy, valuation and allocation
(ii) Completeness, and
(iii) Rights and obligations.
(c) Describe substantive procedures the auditor should perform to obtain sufficient
and appropriate audit evidence in relation to the redundancy provision at the year
end. (5 marks)
(d) A few months have now passed and the audit team is performing the audit
fieldwork including the audit procedures which you recommended over the
redundancy provision. The team has calculated that the necessary provision should
amount to $305,000. The finance director is not willing to adjust the draft financial
statements.
Required: Discuss the issue and describe the impact on the auditor’s report, if any,
should this issue remain unresolved. (5 marks)
(a) Steps in undertaking a positive receivables circularization for Dashing Co
 Obtain consent from the finance director of Dashing Co in advance of
undertaking the circularization.
 Obtain a list of trade receivables at the year end, cast this and agree it to the
receivable’s ledger control account total.
 Select a sample from the receivables list ensuring that a number of nil, old, credit
and large balances are selected.
 Circularization letters should be prepared on Dashing Co’s letterhead paper,
requesting a confirmation of the year‐end receivables balance, and for replies to be
sent directly to the audit team using a pre‐paid envelope.
 The finance director of Dashing Co should be requested to sign all the letters
prior to them being sent out by a member of the audit team.
 Whereno response is received, follow this up with another letter or a phone call
and where necessary alternative procedures should be performed
 When replies are received, they should be reconciled to Dashing Co’s
receivables records, any differences such as cash or goods in transit should be
investigated further
(b) Receivables Accuracy, valuation and allocation
 Review the after-date cash receipts and follow through to pre-year‐end receivable
balances.
 Inspect the aged receivables report to identify any slow‐moving balances and
discuss these with the credit control manager to assess whether an allowance or
write down is necessary.
 For any slow‐moving/aged balances review customer correspondence to assess
whether there are any invoices in dispute.
 Review board minutes of Dashing Co to assess whether there are any material
disputed receivables.
Completeness
 Selecta sample of goods dispatched notes from before the year end, agree to sales
invoices and to inclusion in the year‐end receivable’s ledger.
 Agree the total of individual receivables ledger accounts to the receivables
control account and to the trial balance.
 Obtain the prior year aged receivables listing and for significant balances
compare to the current year receivables listing for inclusion and amount due.
Discuss with management any missing receivables or significantly lower balances.
 Review the receivables ledger for any credit balances and discuss with
management whether these should be reclassified as payables.
Rights and obligations
 Review bank confirmations and loan agreements for any evidence that
receivables have been assigned as security for amounts owed by Dashing Co.
 Review board minutes for evidence that legal title to receivables has been sold
onto a third party such as a factor.
 For a sample of receivables, agree the balance recorded on the receivable’s
ledger to the original name of the customer on a sales order or a contract.
(c) Redundancy provision
 Discuss with the directors of Dashing Co as to whether they have formally
announced their intention to close the production site and make their employees
redundant, to confirm that a present obligation exists at the year end.
 If announced before the year end, review supporting documentation to verify that
the decision has been formally announced.
Review the board minutes to ascertain whether it is probable that the redundancy
payments will be paid.
 Obtain a breakdown of the redundancy calculations by employee and cast it to
ensure completeness and agree to trial balance.
 Recalculate the redundancy provision to confirm completeness and agree
components of the calculation to supporting documentation such as employee
contracts.
  Review the post year‐end cash book to identify whether any redundancy
payments have been made, compare actual payments to the amounts provided to
assess whether the provision is reasonable.
 Obtain a written representation from management to confirm the completeness
of the provision.
 Review the disclosure of the redundancy provision to ensure compliance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(d) Impact on auditor’s report
the company has included a redundancy provision of $110,000 in the draft
financial statements, however, audit fieldwork testing has confirmed that the
provision should actually be $305,000. The provision is understated and profit
before tax overstated if the finance director does not amend the financial
statements.
The provision included is $110,000, it should be $305,000 hence an adjustment of
$195,000 is required which represents 7.5% of profit before tax (195/2,600) or
1.1% of total assets (195/18,000) and hence is a material matter.
If management does not adjust the redundancy provision, the audit opinion will
need to be modified.
As provisions are understated and profit overstated, there is a material
misstatement, which is not pervasive.